What is Magic Number?
The Magic Number is a ratio showing yearly recurring revenue growth gained for every sales and marketing dollar spent. It indicates the level of operational efficiency of a company, as well as the sustainability of sales and marketing expenditure.
How to calculate Magic Number
ƒ ((current quarter’s recurring revenue – previous quarter’s recurring revenue) x 4) / (previous quarter’s sales and marketing spend)
What is a good Magic Number benchmark?
The ideal range for the Magic Number is between 1 and 1.5, indicating efficient and sustainable sales and marketing efficiency. Most investors also accept Magic Numbers ranging from 0.5 to 1 because it shows that the company is on the right track. However, a Magic number below 0.5 likely indicates unsustainable growth and sales efficiency, while a Magic Number greater than 1.5 may show that the company is under-investing in Sales & Marketing.
A company’s recurring revenue in Q2 is 700K, and their recurring revenue in Q1 was 500K. Their Sales & Marketing investment in Q1 was 600K.
When calculating the Magic Number in Q2, the company will subtract 500K, the previous period recurring revenue, from 700K, to get Q2’s recurring revenue growth of 200K. This quarterly figure is annualized by multiplying by 4 to get 800K.
Finally, this number is divided by Q1 Sales & Marketing investment of 600K to get a Magic Number of 1.3.
((700K - 500K) x 4)/600K = 1.3
More about this metric
The Magic Number is a metric that is useful in measuring the health of a business. It is the ratio of yearly revenue growth to Marketing & Sales expenditure. Typically, the previous period’s Marketing & Sales dollars are compared to the annualized revenue growth in the current period.
The Magic Number represents sales and marketing efficiency, as well as revenue growth sustainability. Due to this, it can be a strong indicator when sales and marketing are healthy but it needs to be considered along-side other metrics, such as payback periods, churn and gross margin. For example, if the Magic Number is 1 but gross margins are low, it indicates that although there is growth, lack of profits may prevent the business from covering costs.
In general, tracking the Magic Number is a way to either rectify inefficient spending on Sales & Marketing, or consider expansion of successful investments.
If the Magic Number < 1:
Review ROI positive marketing channels and cut low return ones
If the Magic Number > 1:
Invest more in ROI positive acquisition channels
Consider expanding sales and marketing teams
Additional Magic Number recommended resources
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